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By Ross ToddPublished: Aug 5, 2014

Appeals Court Sides With Barclays in Battle for Lehman Assets

An appellate panel on Tuesday affirmed a big victory for Barclays plc and its lawyers at Boies, Schiller & Flexner in long-simmering litigation over the collapse of Lehman Brothers, ruling that Barclays is entitled to billions in disputed Lehman assets.

The case stems from Barclays fire-sale purchase of Lehman’s brokerage business in 2008, when the now-defunct investment bank was overwhelmed by its exposure to the subprime mortgage market. Lehman Brothers’ estate alleged that Barclays had improperly secured a multibillion-dollar windfall in the deal, and the liquidation trustee for Lehman’s brokerage unit claimed that Barclays walked away with about $7 billion in assets that shouldn’t have been included in the sale.

In Tuesday’s ruling, the U.S. Court of Appeals for the Second Circuit concluded that the brokerage trustee, Hughes Hubbard & Reed’s James Giddens, isn’t entitled to two categories of assets: about $4 billion worth of so-called margin assets that Lehman held as collateral in connection with its exchange-traded derivative business, and about $1.9 billion in so-called clearance box assets—securities held in Lehman’s accounts at clearing institutions.

Giddens and his team at Hughes Hubbard have long argued that “cash” was not meant to be included in the brokerage sale to Barclays. But the Second Circuit found that the typical definition of cash—money ready for immediate use—didn’t apply to the assets in question.

“Cash or cash equivalents pledged as a collateral are encumbered and not ready for use,” wrote Second Circuit Judge Ralph Winter. “Moreover, it would be highly unusual for a buyer to purchase [Lehman]‘s ETD business in its entirety but not the collateral that allowed that business to exist, particularly in a time of economic crisis when the value of the underlying assets, e.g., options and futures, would be extremely volatile.”

Boies Schiller’s Jonathan Schiller told us Tuesday that he’s pleased that the Second Circuit has “now completely vindicated Barclays’ position.” He put the total amount of assets and interest at play at more than $7 billion.

Tuesday’s ruling upholds a June 2012 ruling from U.S. District Judge Katherine Forrest. Forrest had reversed much of an earlier ruling by U.S. Bankruptcy Judge James Peck, who partly sided with Giddens in 2011. Peck had outright rejected the Lehman estate’s “windfall” claims against Barclays, and the estate’s lawyers at Jones Day dropped their appeal three years ago.

In a prepared statement, Giddens said he was studying Tuesday’s decision. Hughes Hubbard’s William Maguire didn’t immediately respond to our call.